In the World
Economic data were better than expected across several major economies, helping alleviate some concern about the global growth trajectory in 2019. In China, first-quarter growth expanded 6.4%, slightly above expectations and steady versus the previous quarter. An acceleration in industrial output and strengthening consumer demand were key drivers, in addition to stimulus measures introduced last summer by the Chinese government. In light of the better-than-expected result, Beijing officials signaled a need to balance economic support with continued deleveraging, sparking investor concern that policymakers may slow stimulus efforts. Like China, the U.S. also grew more than expected, advancing 3.2% in Q1, handily outperforming consensus expectations for 2.2% growth, despite a five-week partial government shutdown. However, the underlying drivers of growth appeared more brittle: Less sustainable factors including a build-up in inventories and slower imports were responsible for most of the increase, while slower consumption growth raised some concern (see chart). Even so, stronger retail sales, a rebound in nonfarm payrolls, and a fall in jobless claims late in the first quarter, all helped paint a better picture of the U.S. consumer. In the eurozone, GDP growth ticked up 1.2% in the first quarter, also surpassing expectations as unemployment fell to a 10-year low, and Italy exited recession territory.
Robust risk sentiment helped several equity markets reach fresh all-time highs. Global equities surged over the month – resulting in double-digit returns for many indexes thus far in 2019 – on better-than-expected corporate earnings and economic data, continued accommodation from central banks, and progress on U.S.-China trade talks. The S&P 500 rose 4.0%, with the index constituents on pace to report a smaller-than-expected decrease in profit growth for the first quarter. Of the companies that have reported so far, 78% beat EPS (earnings per share) projections, and 57% announced sales forecasts that exceeded expectations. The S&P 500 index, which is up over 18% so far this year, has now fully retraced the fourth quarter’s drawdown, and set a new all-time high. Credit markets also benefited from solid earnings and robust risk appetites: Spreads broadly tightened, with high yield spreads a remarkable 168 basis points (bps) tighter on the year. As risk assets rallied, bond yields across major developed economies broadly rose, and the U.S. dollar strengthened against most of these counterparts. Lastly, Brent crude oil ended the month above $70 per barrel amid OPEC production cuts, U.S. sanctions on Venezuela’s oil industry, and concern about the upcoming expiration of Iran sanctions waivers.
Meanwhile, April featured idiosyncratic geopolitical developments with generally localized impact. Elections were in focus in April: Polls opened in India, Spain, and Ukraine, among others. Spain’s ruling Spanish Socialist Workers’ Party (PSOE) retained control and increased its seats, while the far-right Vox party entered Congress for the first time. In Ukraine, professional comic Volodymyr Zelensky handily defeated incumbent Petro Poroshenko in the second round of the presidential election, running on a strong anti-establishment and anti-corruption platform. In Turkey, tensions with the U.S. intensified as President Recep Tayyip Erdoğan remained committed to buying a missile defense system from Russia despite Turkey’s membership in NATO, which provoked the threat of sanctions from the U.S. and pressured the lira nearly 7% lower. In Argentina, continued weak economic data, increasing uncertainty ahead of the October presidential election, and weak liquidity weighed on Argentine assets; the peso continued its fall in April to mark a 15% decline so far in 2019. Finally, in the U.K., the Brexit deadline was postponed once again, this time until 31 October, making it likely the U.K. will partake in European Parliamentary elections in late May.
In the Markets
Developed market stocks1 continued their recovery in April, rising 3.5% and approaching all-time highs. U.S. equities2 steadily climbed 4.0% as solid corporate earnings provided a positive outlook for 2019. European equities3 increased 3.8% and Japanese equities4 rallied 5.0% on improvements in the outlook for global growth, trade, and corporate earnings.
Emerging market equities rose5 2.1% overall in April, while performance in individual markets was mixed. In Brazil6, local political issues were volatile, economic data disappointed, and stocks rose 1.0%. Chinese equities7 fell 0.4% as growing concern over potential policy tightening weighed on investors. In India8, stocks increased 0.9% while trading near all-time highs in a volatile month ahead of the general election results in May. Lastly, Russian equities9 rallied 2.5% as the ruble and oil prices strengthened ahead of renewed U.S. sanctions on Iranian oil exports.
DEVELOPED MARKET DEBT
Developed market yields shifted higher in April thanks to still-robust risk appetite and better growth data, even though central banks maintained accommodative stances. U.S. GDP in Q1 2019 topped expectations overall – though underlying trends, including inventory buildup and slower consumption growth, curbed some enthusiasm – and the U.S. 10-year Treasury yield rose 10 basis points (bps) to 2.5%. Yields in most developed regions also rose: 10-year German bunds rose 8 bps to 0.01% while Japanese and Canadian yields rose 4 bps and 10 bps, respectively. In the U.K., Brexit concern marginally diminished after policymakers agreed to postpone the deadline, which helped drive 10-year U.K. gilts 19 bps higher to 1.19%.
Global inflation-linked bond (ILB) markets posted mixed absolute returns across countries in April, but generally outpaced their nominal counterparts as climbing energy prices and positive risk sentiment supported inflation expectations. U.S. TIPS gained modestly for the month, aided by a robust inflation accrual and a modest decline in short-term real rates. In a continuation of the first quarter’s momentum, U.S. breakeven inflation rates10 pushed higher: Oil prices were buoyed by supply headlines, equity markets rallied, and the Federal Reserve continued to preach patience in light of below-target price gains. Following a sharp rally in U.K. rates in March, real yields reversed course in April, ending higher, and the curve flattened. Breakevens in the U.K. continued to trade in line with Brexit headlines, strengthening to begin the month before correcting lower after the announced “flextension” of Brexit negotiations at the EU summit. Uncertainty around RPI (Retail Price Index) reform and weaker March inflation reports further pressured inflation expectations over the latter half of the month.
Global investment grade credit11 spreads tightened 9 bps in April. The sector returned 0.56%, outperforming like-duration global government bonds12 by 0.84%. Risk assets continued to rally, and cyclical industries performed relatively well thanks to a rebound in optimism for growth. Outperformers included the automotive sector, with better-than-expected earnings; telecom, with a tender announcement by one of the largest issuers in the sector; and independent exploration & production companies, with positive sentiment around potential merger-and-acquisition activity.
Global high yield bond13 spreads tightened 33 bps in April. The sector returned 1.45% for the month, outperforming like-duration Treasuries by 1.43%. The 8.7% return year-to-date is one of the strongest starts to a calendar year on record for the high yield asset class, and has been driven by a confluence of factors, including the dovish pivot by global central banks, better-than-expected earnings, reflated equity markets, and perceived progress on U.S.−China trade negotiations. In April, the higher-quality BB segment returned 1.2%, while the CCC segment returned 2.2%. Despite their outperformance so far in 2019, CCCs have not retraced their large decline in the fourth quarter last year.
EMERGING MARKET DEBT
Emerging market (EM) debt finished the month close to flat. External debt14 posted a modestly positive return of 0.12% as an 8-bps tightening in spreads was partially outweighed by a 10-bp move higher in underlying U.S. Treasury yields15. Local debt performance was slightly poorer at −0.18%16 driven by weaker EM currencies versus the U.S. dollar. EM risk sentiment was positive overall, buoyed by strong economic data from China, although the resurgence of idiosyncratic events in Turkey and Argentina were marginal negative factors.
Agency MBS17 returned −0.06%, underperforming like-duration Treasuries by 1 bp. April was the seventh month with the Fed unwound at $20 billion, however with the slowdown in prepayment speeds, the Fed portfolio unwound ~$18 billion in March. As rates sold off, convexity-related selling and higher supply led to MBS spread widening. Lower coupons underperformed higher coupons; Ginnie Mae MBS and 15-year MBS slightly underperformed Conventional 30-year MBS. Gross MBS issuance of $95 billion marked an increase of 19% from March, and prepayment speeds increased 25% in March (most recent data). Non-agency residential MBS spreads were flat during April, while non-agency commercial MBS18 returned 0.31%, outperforming like-duration Treasuries by 39 bps.
The Bloomberg Barclays Municipal Bond Index posted a return of 0.38% in April, bringing total return to 3.28% for the year. Munis mostly outperformed the U.S. Treasury index over the month, despite the sell-off in U.S. Treasuries. The front-end of the yield curve underperformed U.S. Treasuries, while the intermediate portion and the long-end outperformed. High yield munis slightly outperformed the investment grade index for the month, with a return of 0.56% in April. This brought year-to-date returns to 4.41%. High yield performance was primarily driven by positive returns in the special tax and education sectors. April’s total supply of $28 billion was up 5% versus the previous month, but still down 12% year-over-year. Muni fund flows continued to be strong: Aggregate inflows totaled $6.93 billion in April and are up to $29.5 billion for 2019, bringing the market to 16 straight weeks of inflows.
The U.S. dollar ended the month marginally stronger than its G10 counterparts at 0.2%, aided by a number of positive data surprises and a more dovish tilt from several G10 central banks. The euro was essentially unchanged against the dollar, as weaker PMIs (Purchasing Managers’ Indexes) and trade tensions were outweighed by a stronger-than-expected GDP report for Q1. Similarly, the British pound was unchanged versus the dollar despite strong manufacturing data and an extension of the Brexit deadline. The yen, typically a safe-haven currency, weakened 0.5% against the dollar as better-than-expected Chinese and U.S. economic data supported risk sentiment. The Chinese yuan was 0.3% weaker against the dollar as stronger exports and progress on trade talks with the U.S. were offset by dollar strength.
Commodity returns were mixed in April. In energy, oil prices continued to rise amid supportive fundamentals. OPEC crude oil production declined in March on deeper-than-expected cuts from Saudi Arabia and steep losses in Venezuela. In a more aggressive policy stance, the U.S. government announced additional economic sanctions targeting Venezuelan oil exports and an end to waivers for countries to import Iranian crude. The agricultural sector posted negative returns. Wheat prices remained under pressure amid adequate global supplies. Renewed U.S.−China trade tensions and expectations for a large South American crop weighed on soybeans, while corn prices fell despite delays in planting across the Midwest. The spread of African Swine Fever (ASF) continued to support hog prices as the virus is expected to result in a sharp reduction in supply, although the magnitude of the decline is highly uncertain. After rising through the first three months of the year, base metals faltered in April on uncertainty about the global economy and the potential impact of Chinese stimulus. China’s National Bureau of Statistics reported a decline in the manufacturing PMI, and auto sales for the first quarter were down 11.3% year-over-year. Platinum moved higher: Expectations for tough wage negotiations between the industry’s largest labor union and miners may lead to a strike.
Based on PIMCO’s cyclical outlook from March 2019.
In the U.S., we continue to expect growth to slow to 2%–2.5% in 2019 from nearly 3% last year. Factors contributing to the deceleration include fading fiscal stimulus, the lagged effect of tighter monetary policy over the past few years, and headwinds from the China/global slowdown. We estimate that China’s easing will not filter through to U.S. growth until late 2019 or early 2020. Headline inflation looks set to drop to 1.5%−2% this year, while core CPI moves sideways. With growth slowing and inflation remaining below target, the Fed is likely to keep rates unchanged in 2019.
For the eurozone, we expect growth to slow to a trend-like pace of 0.75%–1.25% in 2019 from close to 2% in 2018, as weak global trade exerts significant downward pressure on the economy and Italy slipped into recession. An improvement in global trade conditions through this year should contribute to a gradual reacceleration. Reflecting firmer wage growth, we expect a moderate pickup in core inflation, which has been stuck at 1% for some time. In line with the European Central Bank’s (ECB) forward guidance, we expect policy rates to remain unchanged this year.
In the U.K., we expect real growth in the range of 1%–1.5% in 2019, modestly below trend, and we continue to think that a chaotic no-deal Brexit is a low-probability event. We see core CPI inflation stable at or close to the 2% target as import price pressures have faded and domestic price pressures remain subdued. In the event of a soft Brexit by midyear, a rate hike by the Bank of England in the second half of the year would appear likely.
Japan’s GDP growth is expected to be modest at 0.5%–1% in 2019, broadly unchanged from 0.7% in 2018. With core CPI inflation expected to dip into negative territory (due to temporary factors) around the middle of the year, we expect the Bank of Japan to keep its targets for short rates and the 10-year yield unchanged this year.
In China, we see growth slowing in 2019 to the middle of a 5.5%‒6.5% range from 6.6% in 2018, but stabilizing in the second half of the year as fiscal and monetary stimulus find some traction and a likely trade deal between the U.S. and China supports confidence. We expect fiscal stimulus of 1.5% to 2% of GDP. Inflation remains benign at 1.5%-2.5% in our forecast, and we look for another rate cut by the People’s Bank of China in addition to more reductions in banks’ reserve requirement ratios. Yuan stability is well-anchored with a patient Fed and the understanding that this needs to be a component of the China−U.S. trade deal.